Friday, 19 July 2013

A new shale gas allowance will more than halve the tax rate for onshore shale gas production, or fracking, from 62 per cent to 30 per cent.(1)

Mr Osborne said: "We want to create the right conditions for industry to explore and unlock that potential in a way that allows communities to share in the benefits. This new tax regime, which I want to make the most generous for shale in the world, will contribute to that. I want Britain to be a leader of the shale gas revolution."(2)

But opponents warn that the process for extracting shale gas, by hydraulic fracturing rock with high-pressure liquid to release the gas, or "fracking", can cause earthquakes, pollute water supplies, blight the countryside and affect house prices...(3)

Andrew Pendleton, Friends of the Earth's head of campaigns, said: "Promising tax hand-outs to polluting energy firms that threaten our communities and environment, when everyone else is being told to tighten their belts, is a disgrace. (4) Ministers should be encouraging investors to develop the nation's huge renewable energy potential."(5)

1) First and foremost, these companies don't need tax breaks for this, they need permission to do it in the first place.

And the best way of taxing extractive industries is for the government to declare itself the owner of the stuff underground and to sell it to the highest bidder. If the profits are tax free, then this pushes up the amount the government gets from the auction and vice versa, so the tax rate doesn't really matter.

In practice - given the fluctuations in prices - the neatest solution is for the government to just pay the experts to extract it. So instead of auctioning off licences to extract and then taxing the profits - whether they relate to the real hard work of getting it out of the ground or to the unearned commodity value - at the same rate, the government would do best to do a competitive tender, and whoever agrees to extract it for the lowest price and hand it over to the government (who then sells it straight on again for its full market price) wins the contract. Again, there is no need to tax those profits afterwards.

2) Obviously, the Yanks are years ahead of us, but never mind, the technology seems to work so we could catch up pretty quickly.

3) Right, that settles it then, they've played the trump card which defeats all trump cards.

4) How much money would the government get from fracking if Friends of The Earth had their way? None whatsoever. So however much or however little they get, it's always going to be more than under Friends of the Earth's plan, hence it means a little less belt-tightening for the rest of us plebs (and lower heating costs, hopefully).

5) To paraphrase, "Promising tax hand-outs to landowners who agree to stick up a few useless windmills that threaten our house prices and wildlife, when everyone else is being told to tighten their belts, is a disgrace. Ministers should be encouraging investors to develop the nation's huge shale gas potential."

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comments:

the government would do best to do a competitive tender, and whoever agrees to extract it for the lowest price and hand it over to the government (who then sells it straight on again for its full market price)

@MWYou're forgetting people all over some of the poshest parts of Northern England are going to complain when fracking lowers house prices. The Mail ran a dangers of fracking story (in the US) years ago.It will be interesting, and significant, which way they jump this time.

MW: How is the ordinary extraction tax/petroleum/gas tax structured? If it's like most of these taxes; X % after an allowance of x% ROI, and the ROI is decent enough, this [lowering the tax rate] is just a pure give-away to private sector buddys. There are plenty of examples of companies fighting like mad against such taxes, claiming projects won't be profitable (noteably Australia, Russia), and the reasons are either: 1. the project wouldn't be profitable anyway or 2. it's always better to get super-profits than just profits, and if you have the rights in your pocket, it's good money to stall, ruffle som feathers and have a coward administration lower the tax rate for the sake of "jobs" or something. The interesting thing here is that the UK government seem to be pre-emptive handing out the super-profits. Way to go!